Irish domiciled UCITS funds (“Irish funds”) today were disapproved for general investment by the Chilean Pensions Regulator, Comisión Clasificadora de Riesgo (the “CCR”). The CCR is responsible for establishing approval procedures for, and approving shares of, inter alia, investment funds for Chilean pension fund investment. Under this authority, Irish funds were disapproved from general investment for failing to comply with the provisions of Article 15 of Decision No. 32 of the CCR which says that the rating of the country in which the fund, its manager or holding company are registered shall be at least Category A (defined as: S&P - A (+,-); Fitch - A (+,-); and Moody’s A (1, 2, 3) with the risk rating being assigned by at least two of the three rating agencies).

In mid to late 2010, Ireland underwent a series of credit rating downgrades due to its sovereign debt issues which triggered concerns around breaching this regulation. The Irish Funds Industry Association (the “IFIA”), with the assistance of the Irish Government and the regional Irish Ambassador in Latin America provided information and assurances to the CCR as to the separation between Irish sovereign debt issues and the international investment funds industry in Ireland. They also highlighted the international nature of UCITS, which are governed by a European legislative framework. Following this engagement, the CCR agreed to not automatically disapprove Irish funds but, in October 2010, put Irish funds on a watch list. Irish funds were then reviewed on an ongoing basis by the governing body of the CCR, the Administrative Secretariat. The IFIA, Irish Government and Irish Ambassador continued to engage with the CCR and Chilean Counsel in relation to the ongoing review of Irish funds during the first half of 2011. However, in July 2011, Ireland was assigned a Junk Status rating by Moody’s, although it maintained its BBB+ rating from S&P and Fitch’s. It appears that this downgrade was a tipping point for the CCR and the Administrative Secretariat issued a decision disapproving Irish funds, which was published today in the Chilean official journal.

Dechert has been actively engaging with colleagues and Counsel in Chile to establish the ramifications of this decision and have been informed by Chilean Counsel that, rather than constituting a complete prohibition on investment, the disapproval will result in Irish funds being qualified as restricted investments rather than general investments. Chilean pension funds can invest in restricted investments, but are subject to stricter investment limits and we are currently gathering more information on the exact levels of permissible investment in so-called restricted investments. While the IFIA has received indications that redemption by Chilean pension funds from Irish funds should not be necessary, the Dechert Financial Services Group is exploring the alternative options available to clients affected by this issue, including the options for replicating or merging Irish portfolios into existing umbrellas or sub-funds domiciled in Luxembourg, the UK or the United States.

Dechert will continue to actively monitor and engage on this issue and will issue further client alerts as more information becomes available.